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Spatial Coordination in Agglomeration Bonus Schemes with Transaction Costs and Communication: An Experimental Study

Author

Listed:
  • Simanti Banerjee

    () (University of Nebraska-Lincoln)

  • Timothy N. Cason

    () (Purdue University)

  • Frans P. de Vries

    () (University of Stirling)

  • Nick Hanley

    () (Department of Geography and Sustainable Development, University of St. Andrews)

Abstract

Agglomeration Bonus (AB) schemes reward private landowners to spatially coordinate land use decisions to enhance the supply of ecosystem services. The AB mechanism creates a coordination game with multiple Pareto ranked Nash equilibria, which correspond to different spatially-coordinated land use patterns. This paper experimentally analyses subjects’ participation decisions, land use choices and AB performance in the presence of transaction costs, with and without the option to communicate with neighboring subjects in a local network setting. The experiment varies transaction costs at two levels (high and low), which affects the risks and payoffs of coordinating on the different equilibria. Results indicate a significant difference in participation under high and low transaction costs in the early stages of the experiment. Increased experience reduces participation rates and AB performance. Costless pre-play communication induces full participation and land use choice pertaining to the efficient Nash equilibrium. If communication is costly, the level of transaction costs affects participation levels, the degree of spatial coordination, and the ecosystem services benefits produced. Our study suggests that performance of Payment for Ecosystem Services schemes in general and the AB scheme in particular can be improved through mechanisms intended to reduce the costs associated with participation and communication.

Suggested Citation

  • Simanti Banerjee & Timothy N. Cason & Frans P. de Vries & Nick Hanley, 2015. "Spatial Coordination in Agglomeration Bonus Schemes with Transaction Costs and Communication: An Experimental Study," Discussion Papers in Environment and Development Economics 2015-10, University of St. Andrews, School of Geography and Sustainable Development.
  • Handle: RePEc:sss:wpaper:2015-10
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Coordination Games; Lab Experiments; Local Networks; Payment for Ecosystem Services;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics

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